We saw a spate of pension publications from the FCA at the end of July, suggesting they were determined to clear their desks before the summer holidays.
In just one day we had an update on the regulator's work on non-workplace pensions, final rules on the Retirement Outcomes Review and a consultation on pension transfer advice.
The first indicates a future direction of travel, and the second imposes technical demands on pension providers. But it's likely to be the third paper that will be of most interest to advisers and planners.
This largely focuses on a proposed ban on contingent charging for transfer advice, but also seeks to address what the FCA sees as systemic issues surrounding unnecessarily high ongoing advice fees.
The main proposals
The FCA is proposing the following key changes:
- banning adviser charges that are only payable when a transfer or conversion is implemented (with very limited exceptions);
- limiting firms’ ability to recommend transfers that incur unnecessarily high ongoing advice and product charges;
- improving how charges are disclosed and requiring checks on consumers’ understanding as part of the advice process; and
- introducing continuing professional development rules specific to pension transfer advice.
A clear distinction is drawn between transfers from safeguarded benefits and switches between flexible pension arrangements.
The FCA also wants to make changes to the data required from advice firms, and says it will “amend technical areas of our rules and guidance to clarify and extend existing requirements."
It plans to introduce a single page summary of the suitability report, which seems eminently sensible, and other areas, such as adding clarity around triage services, do seem to address the issues the profession and consumers face.
Significantly, the FCA expects its proposals to reduce consumer demand for defined benefit (DB) pension transfer advice by between 56 per cent and 66 per cent a year.
This will be a key measure in terms of both improving client outcomes and in predicting the effects the changes may have on the advice market.
The implications for advice
I’m somewhat conflicted personally by this push to drive down the demand for pension transfer advice.
I’ve always subscribed to the view, like the FCA, that in most cases transferring a DB pension is unlikely to be in the member’s best interest.
But we all know there are compelling reasons for some clients to exit their DB arrangements. So it seems to me too much of a leap for the FCA to take the view that as much of half of all transfer advice is flawed.
They base this view on their targeted reviews, including one in 2017 which found that less than half of the DB transfers reviewed were suitable.
Yet these reviews focused on the highest risk firms.
If I investigate fraudsters, it’s likely I will find that fraud is commonplace. This doesn’t necessarily mean that fraud is commonplace - it means it's commonplace in that group.
The FCA has a very valid core message. But I worry the regulator risks diluting that and tarring everyone with the same brush when it concludes that because high risk firms advise on unsuitable transfers, everyone else must be doing the same.
To be fair, the FCA is aware of this, and in its cost benefit analysis includes scenarios with higher rates of suitable transfer advice.
However while I may have worries about the methodology, it was inevitable the FCA would revisit this issue.
Many of its suggested changes seem reasonable, although I fear the optimism about the changes not reducing access to advice is misplaced.
There is a clear risk that removing the option of contingent charging, for all but a minority of cases, will lead to fewer consumers being wiling or able to meet the cost of advice.
It may be the FCA sees this as acceptable collateral damage.
Most DB transfer cases need advice, so fewer people being able to access that advice reduces the volume of transfers, which, in the FCA’s eyes at least, is the desired outcome.
The FCA has recognised the risk of reducing access to advice, and to counter that has introduced the concept of 'abridged advice'.
Essentially, this is an advice process that can only result in two outcomes - do not transfer or take full advice.
Its aim is to make it easier for firms to advise those for whom a transfer will not be suitable – weeding out these cases at lower cost hopefully to both the consumer and the firm. Here, the FCA shows how this would work in practice:
This new abridged advice option is only to be offered for transfers relating to safeguarded benefits.
This is presumably because the elements it loses, such as an appropriate pension transfer analysis and transfer value comparator, are only relevant to those transfers.
It may be a missed opportunity to address wider issues about access to advice. I'd have thought offering advisers this primary stage advice option for all transfers would prevent some unnecessary transfer activity, while increasing access to advice.
Away from abridged advice, firms will also now be required to demonstrate that an “alternative scheme”, presumably a non-workplace pension like a Sipp or personal pension, is more suitable than a workplace pension scheme.
This proposal is designed to tackle the perceived conflicts of interest with ongoing charges, and the FCA believes this will reduce clients being transferred into schemes that don't meet their needs.
The regulator sets out detailed guidance on what possible grounds for recommending a scheme other than a workplace scheme might be, and what would not be considered valid too.
So where does all this leave us?
The consultation closes on 30 October, with the proposed changes expected to come into effect from early next year.
It's clear the FCA will be making changes, and hopefully these changes will lead to better client outcomes.
There may be opportunities to enhance advisers' damaged reputation in this sector, and the new abridged advice process may make it easier to focus on the cases that will benefit most from full advice.
But it remains to be seen if the risk of further limiting access to advice had been completely addressed.